[ad#google120x240]Behind the success of every business lies challenges that have to be dealt with and decisions that have to be made. And at the forefront of these business decisions are individuals who may be few in number yet have the responsibility of facing the diverse and countless challenges the business world has to offer. These men and women working behind the scene at the top of the corporate hierarchy are known as the directors.

Members of the board of directors are elected from among the stockholders or members of a corporation and, at the same time, may or may not be employees of the same. And like any recipient of income, the directors’ fees cannot escape the burden of taxation. Recently, the Bureau of Internal Revenue issued Revenue Memorandum Circular 34-2008 which further clarified the tax treatment of directors’ fees for income- and business-tax purposes.

For directors who are, at the same time, employees of the corporation, the fees are treated as compensation income for income-tax purposes. Being so, the fees are subject to the applicable withholding tax on compensation, for which the corporation-employer would be required to withhold. But as compensation received for services rendered by individuals pursuant to an employer-employee relationship, the fees are exempt from value-added tax (VAT).

These tax treatments will apply whenever it is established that the director and the corporation have an employer-employee relationship (e.g. a president of a corporation sitting as a member of the board of directors). When in doubt as to whether or not a director is, at the same time, an employee, the court had laid down the fourfold test in determining the existence of an employer-employee relationship, which are: (1) the power to hire; (2) the payment of wages; (3) the power to dismiss; and (4) the power to control. The power to control is the most important among the four elements.

In the absence of an employer-employee relationship, i.e., the duties of the director are confined to the attendance of and participation in the meetings of the board of directors, the fees shall not be treated as compensation income. Accordingly, the payment of the fees shall not be subjected to withholding tax on compensation by the corporation. Instead, these shall be treated as income derived from the conduct of business or exercise of a profession, specifically as professional fees, talent fees or other similar type of fees. As such, the fees, per diems, allowances and other forms of income payment made to the director shall be subject to the creditable withholding tax at the rate of 10 percent if the gross income of the director for the current year does not exceed P720,000 or 15 percent, if the same exceeds P720,000.

These rules are not new as these had already been provided for in previous regulations. What is distinct from this new circular is the characterization of the directors who are not employees of the corporation as sellers of services. Being sellers of services, their fees shall be subject to business taxes on account of such receipt of income, which may either be the 12- percent VAT on their gross receipts or the 3-percent percentage tax if the director’s gross annual sales and/or receipts do not exceed the threshold, which is at present at P1.5 million. It is to be noted, therefore, that directors who are not employees of the corporation paying the fees shall be subject to both the income tax and the business tax (VAT or percentage tax).

Having these guidelines clearly set, other than simply paying the applicable taxes, directors who are not employees of the corporation would also need to comply with some documentation and other compliance requirements. They would be required to file the percentage tax or VAT returns, whichever is applicable. And if the director is a VAT taxpayer, he will be required to issue VAT official receipts to the corporation so the latter could claim the VAT as input tax. And like any VAT taxpayer, the director is also entitled to claim input taxes as credits against his output VAT, but these should be fully substantiated.

We foresee that this would necessarily involve additional compliance requirements on the part of the directors—issuance of receipts, filing of monthly and quarterly VAT returns and substantiation of input VAT that can be credited against their output VAT. Taking these into consideration will ensure that compliance with the rules is not compromised.

Source: BusinessMirror